How Much Should You Save for Retirement in Canada?

It can be hard to calculate how much to save for retirement. Don’t stress – we’ll show you how.

• This article discusses four methods to determine how much to save for retirement, each with their own pros and cons.

• Consider all the options, then choose a method based on your time, budget, financial literacy level, and risk tolerance.

• While there are certainly no wrong choices, we recommend that you try FI Plan because it tells you how much to save per month to achieve your retirement goals.

Saving money for retirement is a great idea. How much to save – and how often – are important questions to ask at the start of your retirement planning journey. Unfortunately coming up with good answers to these questions is tricky. Don’t worry though – we’ve got you covered. This article covers four ways to figure out how much you should save for retirement.

Method 1: Follow the 15% Rule
Simply multiply your current before-tax annual earnings by 0.15. However, if you are older than 30 and haven’t started saving yet, then this method may not be as straightforward.

Method 2: Pay a Certified Financial Planner
Find a financial advisor with a CFP designation that specializes in retirement planning, then hire them to create a retirement plan.

Method 3: Build Your Own Financial Model
Create a financial model using spreadsheets or code that will run the numbers to determine how much you need to save for retirement.

Method 4: Use FI Plan
Use FI Plan’s free retirement planning tool, which tells you how much to save to achieve your retirement goals based on your answers to a few questions.

The following table makes it easy to compare their pros and cons of each of these four methods.

We’re biased, but the fourth method is our favorite since it combines the best attributes of the first three but without any downsides. That’s why we recommend it to (almost) everyone. But make sure to read all four methods and choose the one that’s best for you.

Method 1: Follow the 15 Rule

The ‘15% Rule’ is a method of determining how much to set aside for retirement. If this is your first time ever asking yourself ‘How much should I save?’, then following the 15% Rule, or a variant of it, is a great place to start.

The Basic Idea

The 15% Rule is pretty simple: save 15% of your pre-tax income for retirement. Let’s say you earn a salary of $50,000 per year. This rule suggests that you should save 15% of that amount, equal to $7,500 per year. That’s $625 per month, or roughly $289 every two weeks.

Key Assumptions

This method is great for people who are just getting started with retirement planning because it offers a quick way to determine how much to save. However you need to understand that this is a generic recommendation that may not work for you depending on your circumstances and retirement goals. The 15% Rule makes a few big assumptions that you should be aware of:

1. It assumes you start saving for retirement at age 25, and that you will retire at age 65.

This gives you 40 years to save and invest.

2. It assumes you will live until age 90.
   This means you need enough savings to cover 25 years of retirement.

3. It assumes your savings are invested in a diversified 60/40 portfolio that earns average returns.
   This portfolio contains a mixture of 60% stocks (including Canadian, American, and International companies) and fixed income assets (including government and corporate bonds). A globally-diversified 60/40 portfolio has historically provided an average annual returns of 5-7% before taxes and fees.

4. It assumes your income increases over time to counter inflation.
   Your income will rise to match the Canadian Consumer Price Index (CPI), which tends to increase by 2-3% per year. This means your income will keep up with ever-increasing costs of living, so you won’t feel the effects of inflation.

5. It assumes your annual income during retirement equals 4% of your total retirement savings.
   This is based on the “4% rule,” which is a commonly recommended strategy for withdrawing funds in retirement to ensure you don’t outlive your savings.

Adjusted 15% Rule

Now let’s take your age into account. Recall that the 15% Rule assumes you start saving (and investing) at age 25 and then retire at 65. But what if you start saving for retirement later in life? The following table answers that question by suggesting a range of percentages of pre-tax income to save for retirement, adjusted for your starting age, but still assuming you retire at age 65 and live until age 90.

Let’s continue with the scenario where you earn a salary of $50,000 per year. Looking at this table, if you start saving for retirement at age 45, it’s recommended that you save 22% to 27%, or $11,000 to $13,500 per year. That’s much higher than if you were to start saving at age 25. This is because starting at age 45 means your investments only have 20 years to compound, compared to 40 years if you started at age 25.

These percentages are designed to ensure that you accumulate enough money to retire stress-free, living off an income that’s roughly 70% to 80% of your pre-retirement income. Of course, individual circumstances like lifestyle, health, and specific goals will affect these recommendations, which is why we consider this approach to be risky. Who knows how your life will change several decades into the future? What if you have more kids than you were planning, or go through an expensive divorce? What if your investments underperform, or inflation skyrockets? Life can be very uncertain - and trying to predict the future is silly. So while following the 15% Rule is a great place to start, we encourage you to explore the other three methods. They are less risky because they help you come up with a savings rate that’s personalized to you, your lifestyle, and your retirement goals, while also introducing a margin of safety that counteracts the uncertainty of long-term financial planning.

Method 2: Pay a Certified Financial Planner (CFP)

Hiring a Certified Financial Planner is an easy, low-risk option for determining how much to save for retirement – if you can afford it.

The Basic Idea

Financial advisors with a CFP designation are licensed professionals with expertise in various financial topics. You can pay them to create a retirement plan for you, which can include a recommendation for how much to save per month to meet your retirement goals.

CFP Services

CFPs offer a variety of financial planning services, including retirement planning, investment management, insurance planning, tax strategy, budgeting, financial goal setting, estate planning, and other such services.

CFP Certification

To obtain the CFP designation, it is required to complete a CFP Board Registered Education Program, pass the CFP exam, have a bachelor’s degree, demonstrate at least three years of full-time financial planning work experience (or equivalent part time experience), and meet certain ethical standards. The ethical standards include adhering to the CFP Board’s Code of Ethics and Professional Responsibility, passing a background check, and acting as a fiduciary (i.e., always in the best interest of their clients). For these reasons you should be able to trust a CFP to prepare a retirement plan for you.

Finding a CFP

The most common ways to find a financial advisor with a CFP include:

1. Using Google to search for financial advisors in your area.
2. Asking friends, family, and your professional network for recommendations.
3. Asking your Bank to recommend a financial advisor.
4. Reaching out to CFPs that you discover on social media.
5. Filtering through the Planner Directory on FP Canada (linked here).

Regardless of which approach you take to find a CFP, the most important things are that they specialize in retirement planning and that they are accredited. Once you have a list of potential planners, verify their credentials and check for any disciplinary history with regulatory bodies like the Canadian Investment Regulatory Organization (CIRO) or the Canadian Securities Administrators (CSA). You may also consider checking the Better Business Bureau (BBB) for complaints or disciplinary actions that may have been raised against any of the CFPs on your list. If available, read reviews from past clients. When you eventually meet with them, ask about their experience, fees, and approach to financial planning. Confirm whether they operate as a fiduciary, and ask them to declare any conflicts of interest.

Working With A CFP

After hiring a CFP, you will be asked to share lots of financial information with them including statements from your banking and investment accounts, pay stubs, records from previous tax filings, and credit reports. They’ll take that information, analyze it, and then create a custom retirement plan that is catered to your lifestyle and goals. This plan will tell you, with a reasonable degree of confidence, what you need to do to retire (including how much to save). The plan will also share insights about your financial future and should disclose any assumptions they made to run the analysis. The plan may also include financial advice such as how to structure your investments. Of course, like when hiring any professional, this service can be expensive. It may also require several meetings between you and the CFP to answer questions and review your plan together.

Cost of Hiring a CFP

The true cost of hiring a financial advisor with a CFP to tell you how much to save for retirement can vary widely. This is because they can charge for their services in a few different ways. The different pricing models are described below.

• % AUM: Many financial advisors will only offer retirement planning advice if you agree to let them manage your accounts. In this case, fees are charged based on a percentage of the assets they manage on your behalf. This is referred to as the “Assets Under Management” (AUM) billing model. Any financial advice, such as recommendations for how much to save for retirement, may be included with this service. For example, if you have $100,000 in an investment account that is managed by a financial advisor who charges a 1% AUM fee, then you would pay them $1,000 per year. The annual cost to you would go up or down depending on the value of the investments in the account.

• Flat Rate: Some financial advisors charge an hourly rate for their services. These advisors are often called “advice-only” planners because they do not manage your banking or investment accounts. Instead, they only provide financial advice. The total cost to you depends on the complexity of your request. Advice that takes longer to prepare will therefore cost more. For advice on how much to save for retirement, expect the advisor to charge you between 4-10 hours of work, depending on the complexity of your personal financial situation.

• Flat Fee: Many financial advisors will offer to charge you a flat fee for a specific, well-defined, non-recurring service. Think of these as little projects, where the advisor gets paid for delivering the project. These advisors also fall into the category of “advice-only” planners, but they differ from flat rate advisors because they only charge a fixed fee. Examples of flat fee services could be one-time preparation of a retirement plan, or a review of your investment asset allocation.

• Retainer: Some financial advisors will charge an annual retainer fee for ongoing financial planning and advice. The annual cost can vary significantly depending on the level of service, the advisor’s expertise, and the scope of advice.

The range of costs associated with each billing model is provided in the following table.

At the end of the day, hiring a financial advisor with a CFP designation is a responsible way to determine how much to save for retirement, but the cost can be high, especially for high-net worth individuals who are charged based on the % AUM billing model.

Method 3: Build Your Own Financial Model

This is an advanced option that is only recommended if you are good with numbers, handy with spreadsheets or code, persistent, and enjoy learning about retirement planning.

The Basic Idea

You are bold enough to create a custom financial model that will help you calculate how much to save for retirement. The model will take the form of a spreadsheet or coded software program. It will consider many factors that influence how much to save. You can make it as simple or as complex as you like, knowing the more variables it handles, the more informative it will be. The model will accept your inputs, do a bunch of math, and then output how much to save for retirement. While the process of building your own financial model will be rewarding and educational, don’t forget that it would be risky to trust the results without first validating your new model. To do that, you should seek help from an actuary or retirement planning professional. They can review your model, test it, help fix errors, catch bugs, and provide suggestions for how to improve it.

Model Scope and Complexity

Before starting, you are advised to do two things:

1. Define the exact question you want your model to answer. It’s easy to get distracted when building a financial model from scratch. It can be tempting to incorporate new features and functions, but in reality you just need your model to do one thing well: tell you how much to save for retirement. Writing down the exact question that your model seeks to answer will help ensure you don’t stray too far during the process.

2. Define the factors you want your model to handle. Spelling out exactly which variables your model should consider as inputs will help limit scope creep - uncontrolled expansion of a project’s scope, often resulting in added requirements and features beyond the initial intent. You can always add more variables later if you find your model too limited in its function. Here is a list of factors that your model could consider:

• Date of birth
• Life expectancy
• Marital status
• The province you live in
• Your desired retirement age
• Your desired annual expenses during retirement (i.e., your spending target)
• Variability in your desired annual expenses during retirement
• Your desired value of your retirement investments at death
• Current value of your retirement investments
• Rate of return on your retirement investments, from now until retirement
• Rate of return on your retirement investments, after retirement
• Variability in the rate of return over time
• Asset allocation of your retirement investments
• Variability in your asset allocation over time
• Inflation rate
• Variability in the inflation rate over time
• Income taxes, both before and during retirement
• Fees paid to advisors, financial institutions, and funds
• One-time expenses that you want to account for (e.g., emergency home repairs, unforeseen medical expenses, financial support of adult children)
• One-time income that you may receive (e.g., inheritances, sale of a property or business)
• Income from a defined benefit (DB) or defined contribution (DC) pension plan
• Income from a Life Income Fund (LIF), Retirement Income Fund (RIF), or similar tax-deferred retirement income account
• Income from an annuity
• Income from a reverse mortgage
• Income from the Old Age Security (OAS) benefit
• Income from the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
• Income from the Guaranteed Income Supplement (GIS)
• Income from non-tax-advantaged accounts
• Decumulation strategies
• Withdrawal strategies to minimize income taxes during retirement
• When to begin receiving income from CPP and OAS
• Province-specific rules about withdrawing from different types of retirement accounts
• Adjusting the amount that you contribute to your retirement investments.

Platforms for Building a Financial Model

You will need a platform to build your financial model. The two options are:

• Spreadsheets (examples include Microsoft Excel or Google Sheets)
• Coding software (examples include Visual Studio Code, R, and Matlab)

There are pros and cons of each to consider, not to mention your current proficiency. We recommend you start using the platform you’re most comfortable with. If you eventually decide that it’s limiting, then pivot and try another.

Execution

Each additional variable that your model considers will significantly grow its complexity, making it harder to build and validate. This article won’t guide you through the detailed process of building your own model since it’s up to you to choose which variables to consider. But give it a shot, since the process of making an accurate calculator for retirement planning is educational, insightful, and rewarding. If you’re determined to learn about the math behind retirement planning, then building a financial model is a great idea that we strongly recommend you attempt. But if you don’t have the time, interest, or skills to pursue this option, then read on to method 4 below.

Method 4: Use FI Plan

Using a FI Plan is a great way to determine how much to save for retirement. The process of using FI Plan is outlined below. It should take you less than 10 minutes to get through all the steps.

1. Navigate to the FI Plan home page on the (www.fiplan.ca).
2. Click the Start Now button to begin using the web tool. It’s 100% free. You don’t need to create an account, provide your email address, or share credit card information.
3. Answer all the questions. Your answers will tell us everything we need to determine how much you’ll need to save for retirement to achieve your retirement goals. Try to answer these questions to the best of your ability, but feel free to skip questions that you struggle with. You can always go back and update your answers later.
4. Watch a few short video ads. FI Plan is supported by ad revenue, so we appreciate your patience.
5. Voila! Your results are ready to review. Our app will recommend how much to save for retirement. Your results will also include a plot that shows how the total value of your retirement savings changes over time.
6. At this point you’re done. Feel free to go back and change your answers to the questions to see how your inputs affect the results.

Before you go, here are a few more things to know about FI Plan:

• It’s reliable. You can trust that your results are accurate, assuming that the information you provided is also accurate.
• It’s easy. You don’t need to be a financial whiz to use FI Plan. Just answer the questions in the questionnaire to the best of your ability.
• It’s personalized. The results you get are custom to your retirement goals and financial situation.
• It’s built for Canadians. Results consider the nuances of the Canadian financial system (and not our neighbors to the South like so many other retirement calculators).

Summary

It can be hard to accurately calculate how much to save for retirement. The methods discussed in this article give you a few ways to come up with an answer, each with their own pros and cons. We encourage you to spare yourself the headache and just try FI Plan. If you’re not satisfied, try the other methods. And don’t hesitate to reach out if you have questions. We’re here to help!